On September 8, 2014, the United States Court of Appeals for the Fifth Circuit (“Fifth Circuit”) upheld a rule issued by the Public Utility Commission of Texas (“PUCT”) which restricts Qualifying Facilities (“QFs”) that generate non-firm power from entering into Legally Enforceable Obligations (“LEOs”).  The PUCT had promulgated the rule as part of Texas’ implementation of FERC’s Public Utilities Regulatory Policies Act of 1978 (“PURPA”) regulations. The Fifth Circuit reversed the lower court’s finding that such requirements were inconsistent with PURPA, remanding for a further determination.  The Fifth Circuit also vacated the portion of the lower court’s order related to a specific PUCT order as lacking subject matter jurisdiction.   

FERC’s PURPA regulations provide QFs with two ways to sell power to utilities: 1) a QF may provide power on an “as available” basis, with the power to be priced at the time of delivery; or 2) a QF may provide power through a LEO and the price of power can be calculated either at the time of delivery or fixed at the time the LEO is incurred.  A LEO is not specifically defined by FERC’s regulations, though FERC has commented on the boundaries of the LEO in some of its decisions.  Generally, however, states have been given discretion to determine the precise point at which a LEO arises.  The PUCT’s rule permits only QFs that generate firm power to enter into a LEO through which it can access the fixed method of pricing.

The PUCT issued an order pursuant to this rule denying a request by six wind developers (subsidiaries of and collectively referred to as “Exelon”) to require Southwestern Public Service Company (“SPSC”) to purchase output from their wind QFs at avoided-cost rates over a specified term.  The PUCT denied their request after finding that the wind developers did not generate firm power and, therefore, under the Texas firm power rule could not establish a LEO for SPSC to purchase their output over a specified term.  In issuing the order, the PUCT clarified that it could conceive of a situation where a wind company could provide firm power and that it was not restricting wind generators as a class from establishing LEOs, but only the wind companies at issue in the proceeding (see October 22, 2009 edition of the WER).

Exelon filed a petition for enforcement and request for declaratory order at FERC in which Exelon argued that all QFs are entitled to create LEOs.  In response, FERC issued a declaratory order holding that the PUCT’s firm power requirement was inconsistent with PURPA and FERC’s regulations.  However, FERC declined to exercise its enforcement authority under PURPA and did not initiate an enforcement action against the PUCT.  Exelon then filed in federal district court seeking declaratory and injunctive relief related to the PUCT rule generally and the PUCT’s specific order finding that Exelon’s wind QFs were unable to establish LEOs.  The district court permanently enjoined the PUCT from requiring a QF to provide firm power as a condition to creating a LEO and found that the PUCT order failed to appropriately implement PURPA.

In reversing the district court’s enjoinder of the PUCT’s rule requiring QFs to provide firm power in order to claim a LEO, the Fifth Circuit found it appropriate for the PUCT to limit the category of QFs that may form an LEO.  The Fifth Circuit explained that “under the cooperative federalism scheme created by PURPA, it is the PUC, rather than FERC, that defines the parameters for when a [QF] may form a [LEO].”  Further, the Fifth Circuit found that the plain language of the FERC regulation failed to prohibit the PUCT’s discretionary decision as it did not mandate that all QFs be allowed to form a LEO.  Finding no conflict between the PUCT rule and FERC regulations, and determining that FERC had left it to the states to define the parameters for creating an LEO, the Fifth Circuit “therefore accord[ed] no deference to the interpretation in FERC’s [declaratory order].”

With regard to vacating the district court’s decision that the PUCT order failed to implement PURPA, the Fifth Circuit explained that under PURPA there are two separate avenues for review of a state utility regulatory decision: federal courts have exclusive jurisdiction over broader PURPA implementation challenges, and state courts have exclusive jurisdiction over the narrower issue of how PURPA is applied in specific contexts.  Despite Exelon’s protestations of a broader implication, the Fifth Circuit found that the PUCT order was a specific application of Texas PURPA implementation and was therefore required to be addressed by the state court system.

Circuit Judge Edward Prado concurred as to the jurisdictional analysis, but dissented from the majority’s decision regarding PUCT’s firm power limitation for LEOs, instead arguing that FERC, as the agency that authored the PURPA regulations, deserved greater deference in its interpretation.  He also countered that the language of FERC’s PURPA regulations, which state that each QF shall have the option to provide energy pursuant to an LEO, should be read as a mandate that all QFs be allowed to form a LEO, even those that can provide nonfirm power.

To view the order, click here.